Why a deal on tax harmonisation might not boost support for the single market

A FEW times a year, Charlemagne has the luck to teach students at a European management school in Paris. It is an enlightening experience (for your columnist, at least). One popular question has been why some European Union policies are so contentious in places like France, notably the commitment to an internal market based on “free and undistorted competition”. After a while, the penny dropped. If you play word association, it turns out that for many in a Parisian classroom, the polar opposite of “competition” is “solidarity”: ie, the useful rigour imposed by competition is overshadowed by the pain caused as society divides into winners and losers. For Anglo-Saxon liberals, the instinctive opposite of “competition” is “monopoly”: ie, the pain of competition is justified by a quest for fairness, even before getting to arguments about efficiency and companies' long-term fitness.

In Paris the idea that a free-market liberal may believe he is defending a moral position (rather than a necessary evil) often causes surprise. In parallel, it is salutary to be reminded that the other side has a point too. The open borders written into the EU can be both positive and painful, as globalisation produces losers as well as winners. From the earliest days of the single market, EU leaders have attempted to square this circle by presenting the project as a grand bargain. Popular consent for liberalisation was bought with promises of solidarity in the form of welfare safety nets at the national level, and hefty flows of aid from rich to poor countries at the EU level.

For some years, this worked. Suddenly, though, a striking number of senior EU figures are convinced that the grand bargain is breaking down. This may seem odd for, despite the social unrest predicted as the financial crisis broke out, Europe's streets are mostly calm. Yet the private talk among Brussels policy types and senior Eurocrats is bleak. The debate is about avoiding the EU's decline into irrelevance, or even “gradual disintegration”.

Part of the gloom predates the financial crisis. Defenders of the single market point to how national governments and the European Parliament watered down a directive that aimed to free trade in services (the bulk of any modern economy), long before the bubble burst in 2008. The crisis has deepened the gloom, though. Senior Eurocrats argue that public confidence in free markets has been shattered by the perception (carefully stoked by some politicians) that the crash is, in essence, a crisis of Anglo-Saxon financial capitalism. They talk of rising economic nationalism and a decline in the popular legitimacy of the EU and its institutions, and worry that these two trends are feeding each other in a vicious circle.

Too many countries, including some of the biggest in the EU, tell voters the single market is “an obstacle to growth and to the prosperity of their citizens,” complains one EU leader. The EU “cannot go on for ever” like this, he adds. Citizens must be convinced there is a “social dimension” to Europe: if the single market stands only for competition rules and the promotion of structural reforms, “we are lost”.

Others worry that the economic crisis, with its national bail-outs of once swaggering firms and financial institutions, heralds “the return of the state” in the European economy. Consider why so many governments have tried to block foreign takeovers of big firms, says an EU adviser: in a crisis, governments think they can control domestic employers, making them postpone restructuring and job losses in return for help. To such governments, the single market's rules are an obstacle to the “social” policies that they think may be needed to keep them in office.

Finally, there is a consensus that Europe's wobbling faith in the single market has come at a perilous moment. Lord Mandelson, a former European trade commissioner now back in Britain as business secretary, delivered a speech in Brussels on November 6th giving warning that, without bolder leadership, Europe risks playing a “merely walk-on role” in a “totally reordered global economy” dominated by America and China.

In Brussels, the fashionable talk is of a new grand bargain, in which consent for continued liberalisation is buttressed by new guarantees of solidarity. It is telling that a prominent grand-bargain advocate (and former single-market commissioner), Mario Monti, has been asked to write a study of the single market by the European Commission's president, José Manuel Barroso.

The full Monti

Mr Monti's big idea is a swap: liberalism in exchange for redistribution. In concrete terms, Mr Monti talks of curbing tax competition between EU countries, so that governments can pay for social policies dear to European voters even as they fix their battered public finances. This could mean agreed minimum tax rates, he suggests, notably on capital and corporate profits. In exchange, governments would commit themselves to defend and deepen the single market. Could that work?

National governments have rejected all talk of tax harmonisation many times. New members, especially, have used low corporate taxes as a competitive advantage. They are unlikely to throw this away, even if the crisis is disrupting some settled policies: low-tax countries like Ireland and Latvia have raised rates, even as Germany plans tax cuts to boost its economy.

Perhaps the biggest problem concerns political good faith. A danger is that anti-tax-competition politicians would just pocket any tax deal but still keep bashing the single market, leaving public consent fragile. For a grand bargain to work, the politicians would have to admit that it existed, and that they had willingly signed up to a balance of liberalism with safety nets. And that would mean European politicians admitting that both are needed to create a fair, just society: a tall order.